South Korea has achieved a high level of national informatization in recent years. The country is a world leader in internet access speed, some 92 percent of population is internet users, and, in 2005, South Korea was the first nation to complete the transition from dial-up to broadband internet access. The government is pursuing an active ICT development policy by adopting master-plans for national informatization and initiating the establishment of various institutions in the field of cybersecurity and internet regulation.

One could assume that South Korea should be at the vanguard of cryptocurrency introduction as well, and to some degree, this is correct, inasmuch as South Korea is the world’s third largest bitcoin trade market and therefore has a great potential to attract digital currency investment. However, since 2017 the Korean government maintains an ICO (Initial Coin Offering) ban policy, i.e. it prohibits any forms of receiving investments in exchange for cryptocurrency sale from domestic companies. Many consider such a stance counterproductive and say it seriously affects cryptocurrency trade by making prices volatile and thus undermining the market.

The South Korean government certainly has a strong rationale for restricting ICOs, since such form of investment may involve substantial risks of defrauding due to the anonymity of ICO transactions (not to mention that cryptocurrencies have been generally associated with illegal activities for a long time). The official South Korean position on the issue is expressed in the Financial Supervisory Commission’s statements. The conclusions of its 2019 report examining the activity of 22 domestic companies which had been running ICO businesses abroad confirm that unregulated token sales are too risky and unstable to institutionalize ICOs. In August 2019, FSC chairman candidate (subsequently elected chairman) Eun Sung-soo reiterated government’s commitment to take a “cautious stance” toward ICOs and mentioned on several occasions that significant work is yet to be done regarding the legalization of this type of cryptocurrency sale.

The situation is further complicated by actual fraud or failure cases, for example, the closure of Coinnest, one of the largest crypto exchanges in South Korea. Coinnest is notorious for a corruption scandal in which its top executive was charged with accepting a “billions of won” bribe and conducting an “accidental” airdrop of more than $5 million to its clients. Both incidents provided a direct impetus for Coinnest’s closure and, along with a Ministry of Justice 2019 report estimating losses from cryptocurrency crime over a two-year period at $2.3 billion, generated a distrust on the part of the government toward the feasibility of ICO legalization. Nevertheless, this doesn’t mean that South Korean leaders are eager to hinder the development of blockchain and cryptocurrency technologies; on the contrary, they do admit the possibility of legalizing ICOs in the future, provided that a proper regulation framework would be designed in order to minimize investment risks.

But it may not be easy to develop efficient regulation because the question of cryptocurrency circulation concerns a rapidly evolving information space, which has proven so far difficult to define as a legal reality. The example in this regard is the case of public debates over cybersecurity and cybercrime regulation in South Korea: Not only legal difficulties prevent government from adopting comprehensive cybersecurity policy guidelines, but the opposition’s strong disapproval of embedding the concepts of “cybercrime” and “cyberterrorism” in legislation (understood as a measure that aims to eventually provide authorities with more tools of tight control over information spaces) stalls the process of state policy adaptation to the challenges of the fourth industrial revolution.

Сryptocurrencies may await the same fate, being assessed by some as a potential threat to the economic sustainability of the nation and thus obtaining a degree of relevance similar to that of cybersecurity. The opposition Liberty Korea Party has already taken advantage of the situation with ICOs when criticizing the administration’s economic policy: the LKP’s 2020 economic transformation plan (dubbed “Wealth of People,” paraphrasing Adam Smith’s famous work) condemns the government’s reluctance to legalize cryptocurrency funding as being counter-progressive and restrictive towards open market principles. The world’s crypto community has subscribed to that criticism, including Vitalik Buterin, the inventor of the Ethereum cryptocurrency, who urged the South Korean government to ease regulation of the blockchain industry, mentioning that the ICO ban will inevitably affect further introduction of blockchain technology due to the inherent interconnection between crypto and blockchain.

Moon Jae-in’s administration, nevertheless, understands the complexity of the situation and has no intention to give up the idea of ICO legalization completely. As a preliminary and experimental step to the future blockchain liberalization, a decision has been made to establish a “regulation-free” zone in Busan, where some of the blockchain-related restrictions are now lifted in the form of digital voucher introduction. This voucher can be exchanged in local cash and also used in transactions in various blockchain services. Although it’s not the same as allowing ICOs, such initiatives demonstrate that the Korean government is open to a search for compromise, albeit a tentative and cautious one.

Such attention is paid to the ICO issue for political reasons. The North Korean factor in many respects shapes both South Korean domestic and foreign policy planning, and cybersecurity is no exception to this. The recent years have been marked by an extensive public discussion on the North Korean cyber threat, generally attributed to the activities of North Korean hackers. Whether the North Koreans are really involved in numerous cyberattacks (including the infamous Sony Pictures hack or WannaCry ransomware attack) or some parties are trying to exploit the image of North Korea as a hacking superpower for their own purposes is the subject of ongoing debate, but what remains crucially important is the high level of the securitization of the North Korean hackers issue in South Korea. Beyond that, a particular North Korean interest in cryptocurrencies as targets for cyberattacks is frequently noted: North Korean hackers are allegedly responsible for multiple attacks on both crypto exchanges and individuals owning cryptocurrencies. According to information provided by the United Nations Security Council Panel of Experts for sanctions on North Korea, North Koreans have stolen around $670 million in foreign currency and cryptocurrency over the 2015–2018 period; South Korean estimates reach “tens of millions of dollars” in cryptocurrencies stolen by North Korea in the last year alone. Such data and general discussion cannot but provoke a reaction aimed at efforts to protect the cryptomarket. The ICO legalization issue thus also belongs to the national security domain and the security discourse has the special claim on it, which would make it difficult for an opposing party to deregulate blockchain in case they come to power. The opposition would find themselves exactly in the same position as the current administration.

In light of the above, the prospects for lifting the ICO ban remain unclear, since some technical (lack of intellectual and technological resources as well as bureaucratic complexities) and economic (inherent volatility of cryptomarket) problems are amplified by posing it as a cybersecurity challenge. The steps toward deregulation taken by the government in trying to establish an experimental blockchain zone are important, but it can hardly be said that the complete legalization of blockchain is going to happen in the foreseeable future. The ICO conundrum can nevertheless be used as a powerful tool of anti-Moon Jae-in critique and, on top of unfolding public disapproval of Moon’s economic policy, it can possibly contribute to the undermining of the authority of current administration, even though the problem seems to go beyond the question of who holds power.

Valentin Voloshchak is a teaching assistant at the Department of International Relations at the Far Eastern Federal University

This work was supported by the Core University Program for Korean Studies through the Ministry of Education of the Republic of the Korea and Korean Studies Promotion Service of the Academy of Korean Studies (AKS-2015-OLU-2250003).